(CMG) Chipotle Mexican Grill Shops Locally

Chipotle Mexican Grill Inc. (CMG) has raised its target of using local produce to more than 10 million pounds for 2011 from about 5 million pounds set for 2010. Previous goals were 50.0% for 2010, 35.0% for 2009 and 25.0% for 2008. However, in 2010, the company purchased about 9 million pounds of local produce, which far exceeded its goal of 5 million.

The use of locally grown produce is a part of Chipotle’s Food with Integrity program. Chipotle is the only national restaurant company to use fresh produce since 2008. Food with Integrity focuses on increasing the use of naturally raised pork, chicken, beef and organic produce.

The produce is generally procured from within 350 miles of its distribution centers as against 1,500 miles which is the average distance that food items in America cover before reaching a restaurant.

Chipotle primarily sources oregano, red onions, tomatoes, bell peppers, jalapenos and romaine lettuce from family owned farms. The company also gets some farming done in California for lemons, cilantro and avocados.

However, to ensure smooth supply to its 1,100 restaurants nationwide, Chipotle works within each region of the country. We believe the program also helps Chipotle to support farming communities around the country.

There is an obvious uptrend in sourcing locally grown food with customers becoming more heath conscious. This movement is expected to attract more traffic to Chipotle particularly with the ongoing Food With Integrity initiative. It also gives the company as competitive advantage over the likes of McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM) in the fast-casual market.

Moreover, using higher quality premium ingredients remains justified for Chipotle as it caters to the relatively higher income strata. This was one of the reasons why Chipotle was largely unruffled by the economic downturn.he company’s commitment to better itself goes beyond its ingredients. Notably, it is also making efforts to improve its cooking techniques for certain ingredients and the equipment in the kitchen which should enhance the quality and flavor of the food.

This year, Chipotle aims to increase the use of cheese and sour cream from milk that comes from cows raised in open pastures and source more organic beans grown by means of conservation tillage. Chipotle continues to serve more naturally raised meat than any other restaurant companies with an estimate of 100 million pounds this year.

However, in a cutthroat inflationary environment, Chipotle’s first-quarter restaurant operating margin declined 90 basis points for the first time due to rise in food costs. For the second quarter also, management expects food costs to remain under pressure due to higher-than-expected avocado prices arising from lower-than-expected avocado harvest especially in California. Increased avocado prices will add about 50–60 basis points to food costs during this time.

Chipotle currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral rating on the stock.

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